BRIEFING: EU ETS Innovation Fund could raise €10.7 bln to clean up industry

Published 17:23 on August 6, 2015  /  Last updated at 16:21 on July 3, 2020  /  EMEA, EU ETS  /  No Comments

The European Commission’s post-2020 ETS review proposes to continue earmarking auction cash via a new Innovation Fund, which could award and disburse some €10.7 billion to pilot clean technology projects by the end of the next decade.

The European Commission’s post-2020 ETS review proposes to continue earmarking auction cash via a new Innovation Fund, which could award and disburse some €10.7 billion to pilot clean technology projects by the end of the next decade.

The Innovation Fund will be filled by selling 400 million allowances from the free allocation portion of ETS Phase 4 (2021-2030), plus 50 million of unallocated EUAs from the current trading phase.

The funding is intended to help the EU meet its long term decarbonisation objectives by awarding cash to pilot projects that show promise to driving deep emission cuts in their sectors.

It follows on from the so-called NER300, which earmarked 300 million allowances sold from the New Entrants Reserve of Phase 3 for innovative low carbon projects.

HOW MUCH MONEY?

The proposal aims to use the 50 million Phase 3 EUAs to support projects before 2021, which could generate some €685 million if sold over the preceding three years, according to analyst projections.

The Commission did not say when more awards would be made but estimates the remaining 400 million EUAs will raise up to €10 billion, assuming a €25 average EUA price.

Both amounts are subject to fluctuations in the EU carbon price, a factor which resulted in a drastic shortfall of expected cash to come from the NER300.

In 2008, lawmakers had hoped the NER300 could raise some €6-9 billion but due to the collapse in carbon prices from around €20 to below €3 in the intervening years it has awarded just €2.1 billion.

WHO GETS IT?

The NER300 was designed to support first-of-a-kind investments in renewable energy and CCS. The Innovation Fund will broaden that to also include projects for low-carbon innovation in energy intensive industry, following pressure from lawmakers and energy intensive companies, which stressed their lack of viable abatement options compared to the power sector.

The NER300 followed a complex selection process that included prioritising the cost per amount of clean energy produced, but was also determined by other factors such as  requirements to have a wide spread of technology and host nations.

The first NER300 funding call in 2013 awarded some 20 renewable energy projects but no CCS projects, which all either dropped out or failed to be selected due to lack of viable additional funding.

The second call in 2014 awarded 18 renewable energy projects and one CCS project – Drax’s White Rose in the UK. The projects awarded funding must reach their final investment decisions by June 2018 and enter into operation by latest June 2020.

MARKET IMPACT

The Commission has proposed to start giving cash to projects before 2021, which means the 50 million EUAs that would have otherwise been kept in the MSR will hit the market.

Otherwise, the market impact is unclear, as the Commission has not stated either when it will draw down the remaining 400 million EUAs or when they will be sold.

“If sales are concentrated at any period, for instance in the first two or three years of the phase, or are sold early in 2020, this could moderate price increases during that period,” said Trevor Sikorski, an analyst at Energy Aspects.

The Commission has said these decisions will be made in a separate regulation, which would need to be adopted after the legislative proposal has been agreed by Parliament and Council, which could take until at least mid-2017.

“A balanced approach is needed to provide certainty of available funds, while avoiding a negativeimpact on the carbon market,” the Commission said in its detailed Q&A accompanying the proposal.

The market-moving impact of sales under the NER300 was minimal, as the member-state owned European Investment Bank (EIB) was tasked with drip-feeding the units to ensure they sold at close to market prices.

The EIB sold the units both via screen trades on emissions exchanges ICE Futures Europe and EEX and in deals cleared over-the-counter at a rate of around 20 million a month. The first batch of 200 million EUAs was sold over 10 months between December 2011 and September 2012, the second batch of 100 million sold over five months between December 2013 and April 2014.

Click here for key takeaways and selected reactions to the rest of the Commission’s ETS proposal

By Ben Garside – ben@carbon-pulse.com

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